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The UK's public pension funds can only make ethical investment calls — such as selling out of tobacco stocks — if this does not cause them "material financial detriment", a leading lawyer has ruled.

The legal opinion from Nigel Giffin QC, a leading public-law expert, is likely to prove influential among local authorities, which administer over £200 billion of council workers' pension savings.

It may also come as a blow to campaigners, such as the Chartered Institute for Environmental Health, who argued for funds to sell out of tobacco following the transfer of responsibility for "promoting" public health from the NHS to local-government last April.

Giffin was commissioned by council pension-fund chiefs to give his interpretation of the law late last year, following concerns, first raised by Norfolk County Council in 2012, that this new public-health duty did not sit well with pension funds investing in tobacco companies.

Other councils, such as Hertfordshire, Staffordshire, Gloucestershire and Somerset, have since examined the issue. In London, Brent and Newham Councils have both amended their investment policies to exclude tobacco stocks.

But according to Giffin, the law is clear that councils' investment powers can only be used for investment purposes, "and not for any wider purposes".

He added that councils "may choose to take into account the public-health implications of tobacco investment, but only if the result of such consideration is the replacement of these investments with assets producing a similar return".

And he also said this applied equally to a wide range of ethical and socially-responsible investment proposals. He wrote: "It would not be permissible to invest in social housing just because there was a need for more such housing, if that was not a good and prudent investment."

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Will Pomroy, policy lead for corporate-governance at the National Association of Pension Funds, said the legal opinion "reaffirmed" most pension funds' current interpretation of the law.

He said: "If you want to exclude stocks, there are administrative costs to that and opportunity costs, and the fund administrator will have to take those into account.

"Clearly, the NGOs and campaign organisations that have picked up this issue have made the case that tobacco is not a good financial investment in the medium to long term, but historically, the sector has been a good performer, and in the short-term it may remain so. What is clear is that pension funds have to have this conversation."

Catherine Howarth, chief executive of ethical-investments agency ShareAction, said she believed that the ruling would lead to more challenges to pension funds' tobacco holdings.

She said: "The legal opinion from Mr Nigel Griffin QC endorses the ethical tie-break principle. According to this principle, so long as a local authority pension fund can show that there is no financial disadvantage from not holding tobacco, the fund is free to make that decision.

She added: "I would therefore predict that health workers who are now included in the Local Government Pension Funds will formally request this process be undergone. I further predict it will result in tobacco being held by fewer of the Local Government Pension Funds in future."